Some housing bubble news from Wall Street, Washington and beyond. Bloomberg, "ACA Capital Holdings Inc., the bond insurer being run by regulators after subprime-mortgage losses, won a month's grace to unwind $60 billion of credit-default swap contracts that it can't pay. ACA was founded in 1997 by former Fitch executive H. Russell Fraser, who left the ratings company in 2001 as it shifted focus to structured finance from municipal bonds."

"Fraser said his idea was to start an A-rated municipal bond insurance company to guarantee a new crop of borrowers he sometimes called 'the cream of the crap.' ACA's larger competitors such as Ambac and MBIA had enough cash to get the top AAA ratings on their insured bonds."

"The bond insurers, also known as monolines, guaranteed $127 billion of CDOs backed by subprime-mortgage securities as of June 30, according to S&P. Bond insurers' shares plunged last week and credit-default swaps rose to a record on concern the companies may be unable to meet their obligations as the subprime-mortgage securities and collateralized debt obligations they guarantee slump in value."

"Ambac Financial Group Inc., the second-largest bond insurer, had its AAA credit ranking cut to AA by Fitch Ratings. Both Ambac and its larger rival, MBIA Inc., are under threat of losing the top grades from Moody's Investors Service and S&P, a move that would throw doubt on the ratings of $2.4 trillion of securities."

The Globe & Mail. "'It's a turn of events that has grabbed the attention of credit markets,' said strategist Stewart Hall at HSBC Securities Canada Inc. 'If you lose the insurers you have to consider what kind of cascading events occur.'"

"'We have underestimated the extent of the poor underwriting across the entire mortgage-backed securities and collateral debt obligation market. This kind of systemic failure to assess risk has been difficult for us to believe,' said Citigroup analyst Heather Hunt."

"The risk of European companies defaulting soared to a record on concern credit ratings cuts at bond insurers Ambac Financial Group Inc. and MBIA Inc. may trigger forced asset sales and worsen credit market turmoil."

"'The major risk for credit markets remains forced selling on the back of downgrades of the insurers,' said Jochen Felsenheimer, the Munich-based head of credit derivatives research at UniCredit SpA, Italy's biggest bank. 'The problem right now is there seems no way out.'"

"Credit-default swaps on Ambac, the second-biggest insurer, soared last week to $2.6 million upfront and $500,000 a year to protect $10 million in bonds, implying a more than 70 percent chance of default in the next five years, according to a JPMorgan valuation model."

"It cost $2.6 million upfront and $500,000 a year for a similar contract protecting MBIA debt, signaling traders also see a more than 70 percent default risk in the next five years."

"WestLB AG, Germany's third-biggest state-owned lender, said today it will report a full-year loss of about 1 billion euros ($1.45 billion) and shore up capital after writedowns and trading losses triggered by worst U.S. housing slump in 26 years."

From Reuters. "WestLB said its owners, local community savings banks and the state government of North Rhine-Westphalia, would foot the bill for the losses. It puts Germany back in the spotlight as one of the countries worst affected by the credit markets crisis, which almost sank two German banks and has sucked in many more."

"In a letter to staff, WestLB CEO Alexander Stuhlmann also warned that further writedowns on withering subprime investments could not be ruled out."

From Spiegel Online. "WestLB said that in addition to the loss it also expected to shoulder €1 billion in writedowns. Meanwhile, fears of a US recession led to sharp stock market losses on Monday with the German blue-chip DAX index falling as much as 7 percent in hectic trading before stabilizing in late afternoon. It was the biggest daily decline since the September 11, 2001 attacks."

"'There's naked panic here -- we're seeing a classic crash,' said one share trader. Analysts at JP Morgan Asset Management said investor sentiment had reached 'panic level.'"

"WestLB will lower costs and 'can't rule out' job cuts, said spokesman Marc-Sven Kopka. The state lender, which had 6,205 employees at the end of September, may cut as many as 2,000 jobs, German newspaper Rheinische Post reported yesterday."

"WestLB has provided financing to about $14 billion of investment funds to prevent a fire sale of their assets after they couldn't raise funding on the debt market. It extended a credit line for its $11 billion Harrier Finance structured investment vehicle as well as Kestrel Funding, which has $2.9 billion of senior debt, to help repay commercial paper."

"The bank said in November that it would post a full-year loss because of the 'substantial price losses of structured securities.' WestLB at that time forecast a 'low three-digit million-euro loss' before taxes."

From Deutsche Welle. "Just a few months ago WestLB issued a statement assuring investors that its exposure to subprime securities in the United States was 'relatively limited.'"

"In August 2007, WestLB said there was little reason for concern that it would get caught up in the US subprime crisis as 98 percent of the bank's securities were rated 'A' or better. 'The commitment is relatively limited, and its rating is very high, which signals that we do not have to be too concerned,' a spokesman said."

"German stocks fell for a fifth day Monday. Commerzbank led declines...on news that it was also being downgraded due to losses related to the subprime market tension. The bank's losses are expected to be about 210 million euros for the fourth quarter of 2007, according to US investment bank Bear Stearns."

"'The situation remains tense,' Michael Scholz, an equity strategist with WestLB AG told Bloomberg Television. 'January has been a disaster for share prices so far. If this continues, we'll have a problem this quarter.'"

The Associated Press. "Shares in China's banks fell sharply Monday after news reports said its No. 2 lender, Bank of China, might write down holdings of U.S. mortgage securities and two others increased reserves for possible losses."

"The reports were the first indication that Chinese lenders, which have so far avoided damage from the U.S. credit crisis, might face problems due to their holdings of subprime securities. Also Monday, China's banking regulator warned that lenders might face risks from fluctuations in fast-rising real estate prices."

"Bank of China is expected to announce a 'significant writedown' on its $7.95 billion in U.S. subprime mortgage securities, Hong Kong's South China Morning Post newspaper reported, citing unidentified sources."

"'The subprime woes in the U.S. have raised concerns at home about risks in the domestic mortgage market and prompted selling in banking and real estate companies,' said Wang Junqing, an analyst at Guosen Securities in Shanghai."

"China's banks have seen revenues and profits soar in recent years, driven by a fast-growing economy and rising real estate prices. But the country's industry regulator warned in a report released Monday that they might face higher risks from fluctuating real estate prices and financial conditions."

"'Property market price fluctuation possibly could increase credit risks facing the banking industry,' said Jiang Dingzhi, vice chairman of the China Banking Regulatory Commission, said in a report."

"Chinese regulators have raised interest rates repeatedly over the past year and tightened lending standards in an effort to cool a boom in investment in real estate and other assets. They have warned repeatedly that runaway spending could lead to a debt crisis if investors in ill-conceived plans default on loans."

The Sydney Morning Herald. "Almost $43 billion was wiped from the Australian sharemarket yesterday after panic selling caused the 11th consecutive day of losses."

"The longest sell-off in 26 years, and the strong prospect of more days of red ink to come, takes the market's losses since the start of this year to almost $200 billion, as fears of a recession in the US continue to cause havoc on global sharemarkets."

"Investors dumped financial service companies because of fears they could be hit by the fallout from the US subprime mortgage meltdown."

"'What perhaps we are seeing a foretaste of is that most financial companies can go bust because they have so much leverage,' said Hugh Giddy, a portfolio manager at Cannae Capital Partners. 'Allco, MFS and some of the property trusts are all in danger if they have too much leverage - people are becoming risk averse about lending money.'"

"'They are battening down the hatches for recession. This isn't over; simply because of the pattern of refinancing of subprime,' said Colonial First State's head of investment markets research, Hans Kunnen."

"Jean-Claude Trichet and Lawrence Summers accurately warned investors a year ago about being too complacent."

"Former U.S. Treasury Secretary Summers returns to the World Economic Forum in Davos, Switzerland, this week urging quick action in the form of economic stimulus to head off 'a cascading loss of confidence' in the U.S. economy after the collapse of its housing market."

"'When you have recessions from bubbles bursting, they tend to be protracted,' says Summers, a Harvard economist. 'There is the possibility, not yet at all the probability, that a recession could prove long and severe.'"

"As the hubris that Trichet and Summers decried last year is replaced by fear, an aversion to risk-taking may worsen the outlook for the world economy."

"'Davos was marked last year by an irrational exuberance,' Josef Ackermann, CEO of Deutsche Bank AG, Germany's largest bank, said in an e-mailed response to a question. 'I hope that we don't swing to the opposite this year and give in to an irrational depression.'"

"Bankers are dumping derivatives that drove the credit boom. At the same time, they're constraining lending and eliminating jobs."

"'We have to pay for the sins of the past,' Klaus Schwab, the World Economic Forum's founder and chairman, said in a Jan. 11 interview. 'The mood of Davos has changed.'"

"Trichet said at the 2007 forum that a 'reappreciation of risk' was 'likely.' Summers compared the confident mood then with the market sentiment that prevailed just before World War I."

"The financial crisis may turn out to be one of the worst ever, concludes a new paper co-written by Davos speaker Kenneth Rogoff of Harvard, the former chief economist at the International Monetary Fund, and Carmen Reinhart of the University of Maryland."

"'The big question is how deep the losses in the banking sector will be,' Rogoff said in a Jan. 15 interview. 'They will be at least $300 billion to $400 billion, which would be a moderate crisis. But if house prices continue to drop, we could see two or three times those losses, and it will one of the bigger financial crises.'"

The Press Telegram. "The call to freeze interest rates is fast becoming the rallying cry for Democratic presidential candidates. Hillary Rodham Clinton is the latest to jump aboard. During a debate in Nevada last week, she called for an immediate five-year freeze on mortgage interest rates."

"Interest rates move in response to many stimuli - too many for the government to lasso. And they are pretty much a private-sector affair. Those interest rates the candidates want to freeze are a revenue stream investors bet on."

"'You would be getting a forced haircut on your investment from the government,' said Keith T. Gumbinger, VP of mortgage-rate tracker HSH Associates."

"Fortune magazine senior writer Jon Birger offered this harsh assessment in an article that popped up on CNN.com: 'Hillary Clinton is no dummy. Even her detractors know that. And yet in last night's Democratic presidential debate in Nevada, Clinton floated what is perhaps the dumbest solution to the current mortgage mess I've heard from a top presidential contender.'"

"This is a bad time for all the players in the mortgage pool, and a rate freeze could make it worse."

"'It certainly would not speed the recovery of the housing market,' Doug Duncan, chief economist of the Mortgage Bankers Association, told Birger in the story. 'The problem now is that investors are already worried about what the risks are, and (a rate freeze) would only widen risk premiums more.'"

"Gumbinger also points out that whoever wins the presidency - Democrat or Republican - won't take office until a year from now."

"'I think a year from now the problem in the American mortgage market is going to look drastically different than what we've seen so far,' he said."

The Statesman Journal. "I need a man. A man who can say 'No.' A man who rejects Big Nanny government. A man who thinks being president doesn't mean playing Santa Claus. A man who won't panic in the face of economic pain. A man who won't succumb to media-driven sob stories."

"A man who can look voters, the media and the Chicken Littles in Congress in the eye and say the three words no one wants to hear in Washington: Suck. It. Up."

"Which leading GOP candidate represents fiscal accountability and limited government? Who will take the side of responsible homeowners and responsible borrowers livid at bipartisan bailout plans for a minority of Americans who bought more house than they should have and took out unwise mortgages they knew they couldn't repay?"

"I don't want to hear Republicans recycling the Blame Predatory Lenders rhetoric. Enough with the victim card."

"Borrowers are not all saints. There's nothing compassionate about taking money from prudent, frugal families and using it to aid their reckless neighbors and co-workers who moved into McMansions they couldn't afford or went crazy tapping their home equity and now find themselves underwater."

"Economist Tyler Cowen points out...something you never hear politicians spotlight. He notes, 'As much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications,' according to research on more than three million loans done by BasePoint Analytics."

"'Many of the frauds were simple rather than ingenious. In some cases, borrowers who were asked to state their incomes just lied, sometimes reporting five times actual income; other borrowers falsified income documents by using computers."

"'Too often, mortgage originators and middlemen looked the other way rather than slowing down the process or insisting on adequate documentation of income and assets. As long as housing prices kept rising, it didn't seem to matter.'"

"As we head toward Super Tuesday, the subprime mess and the economy will dominate, and the Do Something Democrat candidates will turn their spigot of overextended homeowner sob stories on full blast. Do Republicans want a clear alternative? Or will you settle for a lip-service conservative who will reward fiscal recklessness with only slightly less government intervention than the Dems?"

"Message to Washington: Stop treating every defaulting borrower like Mother Teresa."